Discover the critical 2025 updates to the UAE’s Participation Exemption. Learn about the new AED 4M threshold, statutory tax rate rules, and how to exempt dividends from Corporate Tax.

Are Your Foreign Investments Tax-Exempt?

If your UAE business holds shares in foreign companies, these changes could directly impact your tax liability. Here is a breakdown of the 2025 updates and what they mean for your business.

1. The “Subject to Tax” Test: It’s About the Statutory Rate
One of the most welcome clarifications for 2025 concerns the “Subject to Tax” test. Previously, there was ambiguity regarding whether a foreign subsidiary’s effective tax rate or statutory tax rate mattered.
The 2025 Update:
The requirement is met if the foreign subsidiary is subject to Corporate Tax at a statutory rate of 9% or more.
* What this means: If your subsidiary is in a country with a 12% tax rate, but due to local incentives, their effective rate drops to 8.4%, you still qualify for the exemption because the statutory rate is above 9%.

2. The AED 4 Million “Bypass” Rule
Traditionally, to qualify for the Participation Exemption, a UAE company needed to hold a 5% or greater ownership interest. However, high-value investments with lower ownership percentages were often left out.
The 2025 Update:
A new alternative threshold has been introduced. You can now qualify for the exemption if the historical acquisition cost of the ownership interest is AED 4,000,000 or greater.
* Why it matters: This substitutes the 5% ownership requirement and the profit entitlement tests. For example, if you own only 4% of a company but paid AED 5,000,000 for it, you now qualify for the exemption.

3. The Asset Test and Related Parties
The “Asset Test” ensures that the underlying company isn’t just a shell holding non-qualifying assets.
The 2025 Update:
The requirement that 50% or less of the participation’s assets must consist of non-qualifying ownership interests now only applies if the Participation is a Related Party.
* Simplification: If you hold shares in a company that is not a Related Party (generally less than 50% ownership), the asset test does not apply, simplifying your compliance process.

4. Important Reminders: What is Exempt and What isn’t?
While these updates are favorable, it is vital to remember the scope of the exemption.
* Exempt: Dividends and other profit distributions.
* Not Exempt: Interest income. If you provide a loan to your subsidiary, the interest income you receive is not covered under the Participation Exemption and remains taxable.

5. Interaction with Foreign Permanent Establishments (PE)
For tax periods commencing from 1 January 2025, strict recapture rules apply. If you have previously utilized tax losses from a Foreign PE, you must fully “recapture” (repay) those losses before the Participation Exemption can apply to income derived from incorporating that Foreign PE.
Summary of Key Requirements for 2025

To ensure your dividends and capital gains are exempt, your participation must meet the following adjusted criteria:
* Ownership: 5% or greater interest OR an acquisition cost of AED 4M+.
* Holding Period: Intention to hold for at least 12 uninterrupted months.
* Taxation: Subject to a foreign statutory tax rate of at least 9%.
* Entitlement: Entitled to at least 5% of profits and liquidation proceeds (unless the AED 4M cost rule is met).
Need Help Navigating UAE Corporate Tax?
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